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Vista of better times ahead

We reiterate BUY on Cera Sanitaryware (CRS) post our recent interaction with its management and continue to believe the company will be a significant beneficiary of the pick-up in demand from housing segment seen post pandemic. CRS continues to focus on its two major product categories, viz. sanitaryware and faucetware, and has indicated expansion plans in both these segments to be finalised over the next 1-2 quarters. Management stated demand outlook remains robust and continues to be hopeful of doubling the turnover over the next four years with sustained operating margins of ~14-15%. Company indicated that if raw material cost increases in sanitaryware and faucetware persist, the same would be passed on with requisite price hikes. We expect CRS to report revenue / EBIDTA CAGRs of 18% / 25% respectively over FY21-FY24E aided by growth in the high-margin sanitaryware and faucet segments, continued net-debt-free balance sheet and healthy return ratios (RoE: 19% in FY24E). Maintain BUY with an unchanged Mar’23E target price of Rs5,545, set at 32x FY24E P/E (in line with 5-year average, 1-year forward P/E).

Revenue growth to be driven by sanitaryware and faucetware segments: CRS management believes sanitaryware and faucetware will together continue to constitute ~85% of total revenues and tile business ~15% going ahead too. Company wants to double its revenues over the next four years and plans to undertake capex in its sanitaryware and faucetware businesses, which shall take care of future growth. The capex plans will be finalised over the next 1-2 quarters and will be funded through internal accruals. Management stated it has developed a strong outsourcing ecosystem, which will meet the requirements till further capacities are added. We model a revenue CAGR of 18% over FY21-FY24E aided by growth in sanitaryware and faucetware

Sustainable operating margin at ~14-15%: CRS management believes it can maintain margins at ~14-15% going ahead too (average margin over FY12-FY21 has been ~14.9%) due to its focus on the high-margin sanitaryware and faucetware segments. It indicated the company has historically been able to pass on raw material price inflation in both these segments due to strong brand salience and intends to do so going ahead too, if price pressures persist. In faucetware, brass constitutes ~50-55% of the total cost and prices in the segment have been increasing and passed on (YTD cumulative price increase of ~26% has been taken). In sanitaryware, the cost increases have been lower as prices of major raw materials, clay and feldspar (~90% of total RM cost), have been stable whereas gas (~10-12% of total sanitaryware cost) has seen price increases. We have modelled ~15%/15.5% blended operating margins for FY23E/FY24E

Valuations: CRS has a strong net-cash balance sheet with healthy growth prospects due to uptick in housing market. We continue to like the company for its comprehensive product portfolio, wide distribution reach and strong brand presence. Maintain BUY with an unchanged Mar’23 target price of Rs5,545. Key risks to our call: 1) slowdown in demand from housing sector; 2) continued higher input prices, which may dent demand / profitability

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